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Fitch Ratings is raising concern that the government-sponsored enterprises’ (GSEs) response to the COVID-19 pandemic is having a problematic impact on their mortgage-backed securities (MBS) issuances.
Fitch noted that its rating actions prior to the pandemic’s onset were mostly positive for the GSEs’ risk transfer deals. But on May 19, Fitch placed seven initial exchangeable classes on Rating Watch Negative and revised the Rating Outlook to Negative from Stable on five additional tranches from 15 Fannie Mae and Freddie Mac credit risk transfer (CRT) transactions issued between 2013 and 2015 and one private label CRT transaction issued in 2018.
Suzanne Misretta, Senior Director at Fitch, explained this shift to pessimism was the result of the GSEs’ acknowledgment of the pandemic.
"Both GSEs have not responded to the coronavirus pandemic in the same manner they have for natural disasters such as hurricanes in the past," said Mistretta.
Misretta highlighted Fannie Mae's Connecticut Avenue Securities (CAS) series from 2013 and 2014 (C01) and Freddie Mac's Structured Agency Credit Risk (STACR) series from 2013 and 2014 (DN1 and DN2) for failing to carry provisions for grace periods or credit event reversals, adding they lacked the flexibility to address natural disasters and, thus, were among the transactions most at risk given the current environment.
"Some fixed severity deals have either a grace period or reverse credit event that lessens the impact of affected borrowers," said Mistretta. "That said, some bonds are at risk of permanent interest shortfalls since the interest paid will be calculated off of the written down bond balance until the reference pool and bonds are written back up."
Misretta added that the GSEs’ lack of pandemic response and the rigidity of structure in their MBS issuances could result in downgrades of some tranches to speculative-grade, reflecting either an elevated vulnerability of default risk or that default risk is present.
